Monthly Archives: August 2016

Recovery and Resolution: Uneven Bars for CCPs and Banks

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Adam Gilbert, and Armen Meyer.

The CFTC last month issued extensive new recovery and resolution planning guidance (CFTC Guidance) for central counterparty clearinghouses (CCPs). [1] While banks and insurance companies have recently received some relief with respect to their resolution plans, [2] the CFTC Guidance significantly raises the bar on the depth and breadth of detail and analysis expected for CCPs.

The CFTC was the first CCP supervisor to finalize a rule (in 2013) establishing recovery and resolution planning requirements. [3] The CFTC Guidance significantly expands on the 2013 rule and demonstrates that the CFTC is once again leading the advancement of CCPs’ recovery and resolution planning. Although this guidance only applies to the CFTC-regulated CCPs, it is likely to be followed (in at least some respects) by other CCP regulators given CCPs’ increasing importance to the global financial infrastructure.

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The 2016 Proxy Season: Proxy Access Proposals

Yafit Cohn is an associate at Simpson Thacher & Bartlett LLP. The following post is based on a Simpson Thacher publication authored by Ms. Cohn, Karen Hsu Kelley, and Avrohom J. Kess. Related research from the Program on Corporate Governance includes The Case for Shareholder Access to the Ballot by Lucian Bebchuk; and Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

For the second year in a row, the most prevalent governance-related shareholder proposals in 2016 were those that sought to implement proxy access, a mechanism allowing shareholders to nominate directors and have those nominees listed in the company’s proxy statement and on the company’s proxy card. While the continuing momentum of proxy access proposals is due in part to the submission of 72 such proposals by New York City Comptroller Scott Stringer on behalf of the New York City pension funds he oversees, this year was marked by a meaningful increase in proxy access proposals submitted by individuals as well. Consistent with last year, the overwhelming majority of proxy access shareholder proposals called for the right of shareholders owning three percent of the company’s outstanding shares for at least three years to nominate directors in the company’s proxy materials. This year’s proposals, however, have gotten somewhat more sophisticated. More than half of the proxy access shareholder proposals reaching a vote at Russell 3000 companies capped proxy access nominees at the greater of 25 percent of the board or two directors, as opposed to simply 25 percent, which was almost universal last year. And, unlike last year, in which most shareholders proposals were silent on aggregation limits, most proxy access proposals submitted to a vote in 2016 specified that an unrestricted number of shareholders may be aggregated to reach the shareholding threshold.

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Capitalizing on Capitol Hill: Informed Trading by Hedge Fund Managers

Jiekun Huang is an Assistant Professor of Finance at the College of Business at the University of Illinois Urbana-Champaign. This post is based on a forthcoming article by Professor Huang and Meng Gao, doctoral candidate in finance at the College of Business at the University of Illinois Urbana-Champaign.

Governments play an increasingly prominent role in influencing firms and stock prices. According to a Duke University/CFO Magazine Business Outlook Survey in 2013, federal government policies rank second only to consumer demand among the top three external concerns corporations face. The profound effects of political decisions on corporate performance and stock prices are evidenced by recent government policies and actions such as the bailouts of AIG and Bear Stearns, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the Affordable Care Act. As a result, information regarding political decisions is of considerable interest to financial market participants. Yet, little is known about the dissemination and incorporation of political information or its value to financial market participants. In our paper, Capitalizing on Capitol Hill: Informed Trading by Hedge Fund Managers, we test the hypothesis that hedge fund managers obtain and trade on political information through their connections with lobbyists.

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Weekly Roundup: August 19–August 25, 2016


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This roundup contains a collection of the posts published on the Forum during the week of August 19–August 25, 2016.










The New Look of Deal Protection






Whack-a-Mole: The Evolving Landscape in M&A Litigation Following Trulia

Daniel E. Wolf is a partner focusing on mergers and acquisitions at Kirkland & Ellis LLP. This post is based on a Kirkland memorandum by Mr. Wolf and David B. Feirstein. This post is part of the Delaware law series; links to other posts in the series are available here.

The landmark January 2016 Delaware Chancery Court decision in Trulia has led to dramatic changes in the M&A litigation landscape. On a surface level, the results are straightforward—a sharp reduction in the use of pre-closing “disclosure-only settlements” to dispose of mostly nuisance suits filed indiscriminately on virtually every deal whereby a target’s shareholders would receive supplemental pre-vote or pre-tender disclosures (sometimes of questionable value) in exchange for broad liability releases. While some of these settlements involved meaningful disclosure after plaintiffs engaged in appropriate discovery, the monetary benefits of these settlements flowed only to the plaintiffs’ attorneys who received a fee award, usually six figures, for obtaining these disclosures on behalf of the target’s shareholders. In Trulia, the Chancery Court’s growing disfavor of this outcome culminated in the outright rejection of a proposed disclosure settlement and a clear warning that “practitioners should expect that disclosure settlements are likely to be met with continued disfavor in the future unless the supplemental disclosures address a plainly material misrepresentation or omission, and the subject matter of the proposed release is narrowly circumscribed.” READ MORE »

SEC Amendments to Regulation SBSR

Annette L. Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP, and a former commissioner at the U.S. Securities and Exchange Commission. The following post is based on a Davis Polk publication by Ms. Nazareth, Gabriel D. Rosenberg, and Lanny A. Schwartz.

On July 14, 2016, the Securities and Exchange Commission adopted amendments to and provided guidance on Regulation SBSR, its rules governing the reporting and public dissemination of security-based swap data. [1] Among other things, the amendments and guidance supplement Regulation SBSR by:

  • assigning reporting duties for platform-executed security-based swaps that will be submitted to clearing and for security-based swaps that have a registered clearing agency as a direct counterparty (“clearing transactions”);
  • establishing reporting requirements for certain cross-border security-based swaps;
  • providing further guidance on the application of Regulation SBSR to bunched orders and prime brokerage arrangements; and
  • prohibiting a registered security-based swap data repository (“SBSDR”) from imposing fees or usage restrictions on data that is required to be publicly disseminated.

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Defensive Tactics and Optimal Search: A Simulation Approach

Ronald J. Gilson is Marc & Eva Stern Professor of Law and Business at Columbia Law School, Meyers Professor of Law and Business (Emeritus) at Stanford Law School, and a fellow of the European Corporate Governance Institute. Alan Schwartz is Sterling Professor of Law, Yale Law School, and Professor, Yale School of Management. This post is based on a recent paper by Professors Gilson and Schwartz and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes What Matters in Corporate Governance? by Lucian Bebchuk, Alma Cohen, and Allen Ferrell (discussed on the Forum here).

The appropriate division of authority between a company’s board and its shareholders has been the central issue in the corporate governance debate for decades. This issue presents starkly for defensive tactics: the extent to which a target board is allowed to prevent the shareholders from accepting a hostile bid. In the U.S., the board’s power is extensive; control largely lies with directors. While a poison pill would preclude a hostile offer, the Delaware Supreme Court held in Unitrin that the pill is preclusive only if it makes a successful proxy fight “mathematically impossible or realistically unattainable.” That a staggered board together with a pill would require a bidder to run two successive proxy fights does not reach this very high hurdle, despite the Delaware Chancery Court’s observation in Airgas that no bidder has attempted this extended effort.

Normative evaluations of current law face a critical obstacle: defensive tactics raise the social welfare question: to what extent these tactics deter ex ante efficient takeovers. This question cannot be answered empirically because the econometrician can observe bids but cannot observe deterred bids. In our working paper, Defensive Tactics and Optimal Search: A Simulation Approach (July 2016), we write a search equilibrium model of the market for corporate control and solve it by simulating plausible parameters for the variables of interest. Because we specify the number of ex ante efficient acquisitions that could be made, we can estimate market efficiency—the ratio of made matches to good matches—under legal regimes that are more or less friendly to defensive tactics. Also, we argue that the common metric among defensive tactics is time: the ability of various tactics to delay bid completion and thus reduce bidder, and thereby increase target, returns.

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2016 Mid-Year Activism Update

Eduardo Gallardo is a partner focusing on mergers and acquisitions at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn publication by Mr. Gallardo, Barbara L. Becker, Richard J. Birns, Dennis J. Friedman, and Adam J. Brunk. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here), The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here), and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

Our recent survey provides an update on shareholder activism activity involving domestically traded public companies with equity market capitalizations above $1 billion during the first half of 2016. Despite the uncertain domestic and international economic and political climates, shareholder activism continues to be common.

The survey covers 45 total public activist actions, involving 35 different activist investors and 38 companies targeted, during the period from January 1, 2016 to June 30, 2016. [1] Seven of those companies faced advances from multiple investors, including two companies that faced coordinated actions by two investors. [2] Equity market capitalizations of the targets range from just above our study’s $1 billion minimum to approximately $334 billion.

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Interest Rate Risk and Appraisal Risk in M&A Transactions

John A. Bick is partner and global head of the mergers and acquisitions practice at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication and is part of the Delaware law series; links to other posts in the series are available here.

In recent months, there have been a number of important developments relating to stockholder appraisal rights in Delaware. Appraisal rights are generally available to dissenting stockholders in all-cash or cash/stock mergers and entitle the dissenting stockholders to an appraisal of the fair value of their stock by the Delaware Court of Chancery. Stockholders seeking appraisal, including appraisal arbitrage funds that buy stock prior to a merger for the purpose of exercising appraisal rights, also receive interest at a statutory rate that accrues on the eventual fair value—even if fair value is determined to be no greater than the deal price—from the effective date of the merger to the date of payment. While amendments to the Delaware General Corporation Law (“DGCL”) mitigate some appraisal risk with respect to this interest accrual, recent case law highlights that buyers continue to face the prospect of potentially significant post-closing economic exposure in deals where appraisal rights are available. In light of this case law, it is possible that we will begin to see an increased focus by parties to M&A deals, and their lenders, on contractual provisions intended to limit this appraisal risk, especially in transactions that are most vulnerable to appraisal arbitrage claims.

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The New Look of Deal Protection

Fernán Restrepo is John. M. Olin Fellow and Gregory Terrill Cox Fellow in Law and Economics at Stanford Law School. Guhan Subramanian is Joseph H. Flom Professor of Law and Business at Harvard Law School and H. Douglas Weaver Professor of Business Law at Harvard Business School. This post is based on a recent article by Mr. Restrepo and Professor Subramanian and is part of the Delaware law series; links to other posts in the series are available here.

It is well-known in transactional practice that the magnitude of termination fees has gone up over the past thirty years. What used to be 1-2% of deal value in the 1980s increased to 2-3% by the 1990s and 3-4% by the 2000s. This trend cannot be readily explained by changes in M&A fundamentals: as a percent of deal value, it is not obvious why compensation for search costs, out-of-pocket costs, reputational costs, and opportunity costs should be higher today than they were in the 1980s. The more plausible explanation lies in the nature of transactional practice. Nearly two decades ago, Dick Beattie, then Managing Partner at Simpson Thacher & Bartlett in New York City, explained this trajectory to one of us as follows:

“The percentage that is okay has slowly risen. A year ago, two years ago, people were talking about two percent, two-and-a-half percent. Now, you hear them talking about three, three-and-a-half percent. Some are even saying four percent. You sit there and ask, ‘On what basis are you doing that? Where did you get that number?’ There hasn’t been a specific challenge, so everybody pushes the envelope.”

There are important policy reasons for the Delaware courts to set limits on deal protection. Sellers can gain leverage from judicial rules that require some degree of market canvass as a matter of fiduciary duty. The purpose of these limits is to provide sell-side shareholders with full value and a meaningful shareholder vote. Giving boards legal protection against preclusive deal protections prevents bidders from demanding such deal protections in the first place. The result is greater allocational efficiency in the M&A marketplace, which improves overall social welfare.

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